Invest at the start of the tax year

When it comes to saving it is the early bird that catches the worm and the new tax year – which begins on April 6 – marks the ideal time to open a cash ISA.

More than 80% of ISA accounts are opened in the final six weeks of the tax year but you can avoid the last minute rush and make sure you don’t lose out on your annual tax break, by opening your ISA at the start of the new financial year.

Why bother?

Returns on ISAs are tax-free so they are really attractive if you are a taxpayer – in a standard savings account any interest you earn is taxed.

If you invested your full cash ISA allowance (£3,600) in Barclays Golden ISA which is paying 3.61%, you’d earn £129.96 interest over the next 12 months. Alternatively, if you kept the money in Barclays e-Savings Reward account, which is not an ISA and has a rate of 1.26%, you’d earn just £27.22 if you’re a higher-rate taxpayer and £36.29 if you’re in the basic tax band.

You can invest up to £7,200 each tax-year and £3,600 of that can be put into a cash ISA (the remainder can be invested in a stocks and shares ISA. Alternatively you can invest the full £7,200 in stocks and shares). For more information, read our article ‘How to choose a cash ISA’.

What’s new?

A number of providers are offering new products designed to attract the early-bird saver. Alliance & Leicester (A&L) has launched a one-year fixed rate ISA paying 3.0%. You must invest your full £3,600 cash ISA allowance and withdrawals aren’t allowed during the fixed rate term.

If you don’t have the full £3,600 to invest now, Principality Building Society’s new ISA could be a good alternative. It is launching a regular saver ISA paying a fixed rate of 5.0% on Monday April 6. You can deposit up to £300 a month (which means you can invest your full allowance over the next 12 months). As with A&L’s fixed rate ISA, you can’t make a withdrawal during the 12-month fixed term.

What else is available?

These obviously aren’t the only products available to those looking to use their 2009-2010 ISA allowance. As mentioned above, Barclays Golden ISA is still open for new customers. It has the market-leading easy access rate at 3.61%, making it a great option if you want to retain access to your savings.

Natwest and Royal Bank of Scotland (which are part of the same banking group) are both offering a Cash ISA Plus, paying 3.51%. RBS customers with a Royalties Gold or Royalties Private account and Natwest customers with an Advantage Gold or Advantage Private account will also receive an additional 0.50% bonus for the first year – this offer is only available until April 20 so you’ll need to get your skates on if you want to take advantage.

Abbey and A&L (which are both owned by Spanish Bank Santander) are each paying 3.50% on their Reward ISA. However, the rate includes a 2% bonus which you only get if you don’t make a withdrawal during the first year – you forfeit the bonus if you do need to get at your cash during that time so it’s only good value for those who won’t need to access their money in the next 12 months.

None of these accounts accept transfers so you can only invest this year’s ISA allowance.

Other options

If you didn’t get around to moving your existing ISA savings into a higher paying account before the end of the 2008-2009 tax-year, do it now.

Natwest's e-ISA accepts transfers and it pays 3.25% on balances up to £9,999. The rate increases to 3.51% on balances above £10,000. However, you must have a Natwest current or savings account to qualify.

If you've built up more than £30,000 in cash ISAs over the years you could earn 3.20% (fixed for a year) by transferring it to Lloyds TSB's Fixed Rate Cash ISA. However, if you have less than £30,000, the rate isn't as competitive. On balances between £9,000 and £29,999 the rate is 3.0%, which is still attractive, but it's just 1.50% on balances between £3,000 and £8,999.

Alternatively, First Direct's e-ISA and Marks & Spencer Money's Advantage ISA are both paying 3.10% and they accept transfers in. The rate on the First Direct deal is also fixed until the end of April next year, which is another plus point and it permits unlimited withdrawals (this is highly unusual for a fixed rate account as most don’t allow withdrawals, or penalise you with a loss of interest if you do take money out during the fixed term).

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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